How To Choose A 401(k) Financial Planner
A 401k financial planner typically prepares financial plans for his or her clients. The kinds of services financial planners offer can vary widely. Some planners assess every aspect of your financial life-including saving, investments, insurance, taxes, retirement, and estate planning-and help you develop a detailed strategy or financial plan for meeting all your financial goals. Other professionals call themselves 401k financial planners, but they may only be able to recommend that you invest in a narrow range of products and sometimes products that aren't securities.
When hiring a 401k financial planner, you should know exactly what services you need, what services the planner can deliver, and any limitations on what he or she can recommend. In addition, you should understand what services you're paying for, how much those services cost, and how the planner gets paid. 401k financial planners charge for their services in different ways: some charge either a fixed fee or an hourly fee for the time it takes to develop a financial plan, but don't sell investment products; some are paid by commissions on the products they sell; and others use a combination of fees and commissions.
According to Southern California-based (401k) Enginuity (www.401kenginuity.com), twenty-year veteran in developing and running 401(k) administration and 401(k) software and recordkeeping systems, the Internet will be the primary delivery system for 401(k)s by 2007. Many web-based 401(k) plans will run on administration and recordkeeping platforms that plan providers will outsource to 401k specialists and 401k Application Service Providers (ASP).
The advantages of web-based online 401(k) plans are obvious to today's workers, and include use conveniences, real-time monitoring and reporting, and instant re-allocation of their retirement assets. The internet has also dramatically reduce the cost of 401(k) plan administration, saving plan sponsor 50% or more in ongoing fees and costs when compared to the older traditional labor-intensive plans. Outsourcing of 401(k) functions by plan providers will extend the trend towards lower cost, high-quality 401(k) products.
401(k) plan providers of all types, financial institutions including banks, insurance companies, brokerages, mutual fund companies, credit unions, and third-party administrators, are now actively outsourcing 401(k) administration and recordkeeping tasks to 401(k) ASPs --- vendors such as 401k Enginuity, whose sole function is to maintain, updated and supervise software-based 401(k) administration and recordkeeping systems on behalf of plan providers. 401(k) ASP vendors are responsible for all routine day-to-day 401(k) recordkeeping and administration functions, thus allowing the plan providers to reduce internal staff, eliminate the expense and complications of licensing, housing and running hardware and 401(k) administration software in-house. Plan providers can refocus and concentrate their efforts on to the needs of their plan sponsors and plan participants, and rely upon the outsourced ASP 401(k) vendor for the recordkeeping and technical "backbone" supporting providers' Internet-based plans. It is inevitable that some of this 401(k) outsourcing to ASPs will include secondary outsourcing of certain non-critical low-level routine day-to-day tasks to non-US locations, where labor costs are less yet the expertise is abundant.
401k financial planners may come from many different educational and professional backgrounds. If you're considering using a 401k financial planner, be sure to ask about their background. If they have a credential, ask them what it means and what they had to do to earn it.
Some 401k financial planners have credentials like CFP® certification or CFA (Chartered Financial Analyst). Find out what organization issued the credential, and then contact the organization to verify whether the professional you're considering did, in fact, earn the credential and whether the professional remains in good standing with the organization. For a helpful list of various financial industry credentials (including the name of the issuing organization and any education or experience required to attain the credential), please read NASD's Understanding Investment Professional Designations.
If the professional you're considering claims to be a CFP® certificant, visit the website of the Certified Financial Planner Board of Standards. The Board is an independent regulatory organization that licenses financial planners as CFP® professionals. Check to see if the professional is certified as a CFP® professional and whether his or her certification has been suspended or revoked by the Board. You can also call the Board at (888) 237-6275 to obtain additional disciplinary information about the professional.
The Certified Financial Planner Board of Standards also has brochures - What You Should Know About Financial Planning and 10 Questions to Ask When Choosing a Financial Planner - that will help you identify a 401k financial planner who's right for you.
401k financial planners who give investment advise to their clients must register with the SEC or the appropriate state securities regulator. For more information about investment advisers, read our publication entitled Investment Advisers: What You Need to Know Before Choosing One.
Q. How do I select a 401(k) financial advisor?
A. It is a good idea to interview no fewer than three advisors before you make a selection. You are choosing a person whom you must trust, and whose advice you will be willing to follow. Therefore, the personal chemistry between you must be one that fosters trust. Here are some guidelines you can follow:
Question the advisors during your interviews. Ask about the advisor's performance results for his/her clients. Ask where the advisor obtains technical information to support his/her work.
Ask about the advisor's licenses. To give investment advice, an advisor must be registered with the Securities and Exchange Commission (SEC) or a state securities department. If the advisor sells or places products pursuant to your plan, s/he must be licensed by (1) a state insurance department (insurance and annuities), (2) a state securities department (mutual funds, limited partnerships, etc.), or registered with a member of the National Association of Securities Dealers (NASD) (securities). Is s/he a Registered Investment Advisor? An explanation of some of the various licenses held by 401(k) financial planners can be found a few questions down in this section. Ask if the advisor has ever been fined, reprimanded, or suspended. Verify the answer by contacting your state securities department, state insurance licensing/regulation department, the National Association of Securities Dealers (NASD), and the U.S. Securities and Exchange Commission (SEC).
Ask about the advisor's education and credentials. Does the advisor keep up to date in the field through continuing education? There are many capable advisors who perform excellent service for their clients, some who have earned one or more designations, and some who have not. Ask if the advisor holds a credential such as Certified Financial Planner®, Certified Public Accountant, or Chartered Life Underwriter? If so, the planner is subject to the ethical requirements of the credentialing organization as well as varying degrees of continuing professional education. For information about what the many credentials mean, click here. You may contact the credentialing organizations to determine if the advisor's designation is still valid and if there have been any ethical sanctions placed on the advisor.
Ask for the advisor's references. It is reasonable for you to speak with current clients and other 401(k) financial professionals (such as accountants or attorneys with whom s/he has worked). Ask to see samples of financial plans that s/he has developed for other clients in circumstances similar to yours, and for circumstances that you aspire to achieve.
Ask the advisor if s/he will be recommending a full range of 401(k) financial products from a variety of 401(k) financial service companies, or only those of a single company.
Ask the advisor about fee arrangements. Advisors are compensated by hourly fee, project fee (e.g. the drafting of a financial plan), management fee (generally 1.5% of invested balances under management), commission (paid by the financial company issuing the mutual fund or insurance policy), or by a combination of these methods (e.g. fee plus commission).
Finally, be prepared to give the advisor enough information about yourself to allow him/her to make the decision to accept you as a client. Just as the match with an advisor must be right for you, many advisors find that they do their best work when they are equally thorough in their selection of clients.
Q. What do the different licenses and certifications mean?
A. Here are some of the most widely known financial credentials being advertised by 401(k) financial advisors today (IRA.com does not endorse any particular designation, and offers this for informational purposes only).
CFA: Chartered Financial Analyst.
Awarded by the Association for Investment Management Research, this technical designation is designed for investment professionals to support the skills required for portfolio management and investment analysis. Candidates for the charter must pass three levels of examination (one exam may be taken per year). Preparation is via self-study of a body of knowledge published by AIMR and includes financial statement analysis, securities regulations, ethics, capital markets, asset allocation, and application of theoretical concepts. Candidates must accrue three years of related experience and establish AIMR membership prior to award of the charter. AIMR does not mandate continuing professional education for maintenance of the CFA charter.
CFP: Certified Financial Planner®.
Awarded by the Certified Financial Planner Board of Standards, this designation is characterized by the CFP board as a license. Candidates must pass a comprehensive 10-hour examination testing the candidate's knowledge of 401(k) financial planning, investments, estate planning, tax and retirement planning, and ethics. Preparation for the examination is via five or more educational courses under a curriculum approved by the CFP Board and offered at more than 100 institutions throughout the United States. Candidates must have three years 401(k) financial planning experience plus an undergraduate degree to qualify for the award of the license (five years without a degree). CFP licensees are required to renew their license every two years through the completion of 60 hours of continuing education.
ChFC: Chartered Financial Consultant.
Awarded by The American College, this designation is based on the completion of eight distance-learning courses offered by the College. Candidates qualify sequentially through separate post-course examinations. Courses, five of which are approved by the CFP Board as preparation for the CFP license, include 401(k) financial planning, investments, estate planning, tax and retirement planning. Candidates must have two years related business experience plus an undergraduate degree to qualify for award of the ChFC (three years without a degree). Designees who matriculated after June 30, 1989 must renew their designation every two years with the completion of 30 hours of continuing education (designees who began their ChFC studies prior to the 1989 deadline may not be required to prove their attendance at continuing education programs).
CLU: Chartered Life Underwriter.
Awarded by The American College, this designation is based on the completion of eight distance-learning courses offered by the College. Candidates qualify sequentially through separate post-course examinations. Course work emphasizes use and application of life insurance and may encompass life, disability and long-term care insurance, employee group benefits, pensions, and financial, estate, and retirement planning. Candidates must have two years related business experience plus an undergraduate degree to qualify for award of the CLU (three years without a degree). Designees who matriculated after June 30, 1989 must renew their designation every two years with the completion of 30 hours of continuing education (designees who began their CLU studies prior to the 1989 deadline may not be required to prove their attendance at continuing education programs).
CPA: Certified Public Accountant.
Awarded by the 54 U.S. state and territorial boards of accountancy upon the successful completion of four separately scored examinations covering auditing, business law, accounting and reporting on business enterprises, and accounting practices for taxation, managerial, government and nonprofit organizations. CPAs must meet individual state standards for continuing professional education every two years.
CPA/PFS: Personal Financial Specialist.
Awarded by the American Institute of Certified Public Accountants (AICPA) to members who hold a valid CPA license, have passed an examination, and who have completed 750 hours of 401(k) financial planning practice within the previous three years. Renewal requires annual maintenance of the CPA and membership in AICPA, completion of 72 hours of continuing professional education every three years and 750 hours of practice in financial planning every three years. Practice may include personal financial planning process, personal income tax planning, risk management planning, investment planning, and retirement planning.
Q. How can I compare the different designations for Financial Planners?
A. Earned credentials are an important indication of an advisor's academic preparation to serve clients. However, not all designations are created equal. When an advisor presents him/herself as qualified by one or more professional designation, there are four basic questions that you should answer to determine the professional standards represented by the credentials.
Is the designation client-oriented? Some designations are designed for financial managers who work for corporations and are better classified as technical credentials. Advisory designations test the advisor's understanding of an individual client's total financial situation: age, earnings, dependents, tax circumstances, risk tolerance, expense requirements, and much more.
Does the designation demand that the candidate prove mastery of a body of knowledge? Reputable designations require that the candidate pass one or more examinations proving his/her understanding of the technical material represented in the credentialing program. How rigorous is the preparation required for the examination? Some designations simply require attendance at a single seminar and payment of a fee. Considering the complexity of the 401(k) financial services environment, clients must expect more from their advisors.
Does the designation require continuing professional education? Financial Services is one of the most rapidly changing areas of business today. These changes can present a bewildering array of decisions to be made by consumers. Does your advisor stay abreast of this changing environment with a designation that requires a minimal level of continuing professional education?
Is the designation controlled by an independent organization and supported by a code of ethical conduct and/or professional standards? A strong sponsoring organization is your protection should an advisor prove unworthy of the standards of his/her designations. Designation sponsors take seriously the integrity of their brands and will support the clients' interests in order to assure respect for all who advertise the designation. Statutory standards for licensing are generally less stringent than the ethical standards required of most voluntary credentials. Also, some designations have been created by groups of advisors to help them sell their services without having to prove their qualifications to an independent testing organization. Some of these "house" programs are quite effective, but the consumer should be careful to investigate.